Monday, July 27, 2015

Analysis: Honesty Can Backfire in a Performance Review

When can telling the truth be counter-productive?

During a performance evaluation.

In a recent analysis by Ivan Marinovic of the Stanford Graduate School of Business, it was found that honest appraisals actually boost costs and cut profits because they increase the chances of erratic efforts that people put into their jobs.

Marinovic came to this conclusion after building a model that treats a job as a sort of game tournament, using employee competitiveness to drive results. For example, if a manager was less than honest about how well an employee performs, then he can put the pressure on that person to work harder to beat colleagues. Such fudging of the facts can even spur slackers into putting more effort into their work because they worry they're going to get fired.

However, managers have to be careful with this strategy. If employees think the manager is not being honest about their performance, they brush it off and their performance changes very little. It's only when employees buy into what the manager is telling them during performance reviews that they work harder and try to improve because they're more worried about losing out on raises or promotions.

It's important to note that Marinovic is skeptical about the value of performance reviews, just like others on this blog who have expressed frustration with this pervasive practice. But if managers are going to continue to use them, he thought it was important to look at how they impact the bottom line.

His analysis reveals that the ups and downs of employee performance related to performance evaluations can cost companies more because workers simply don't like volatile workloads and will automatically want more money to make up for it. While employees may not be aware of it, they will eventually link what they see as truthful performance reviews with unpredictable schedules that may include after-hours work.

“We show that the value of a firm decreases when the perceived truthfulness of the feedback is higher,” Marinovic says. “The value of the firm is highest when that communication is perceived as worthless.”


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